Suppose the estimated linear probability model used by an FI to predict business loan applicant default probabilities is PD 0 03X 1 0 02X 2 0 05X 3 error, where X 1 is the borrower's debt equity ratio, X 2 is the volatility of borrower earnings, and X 3 is the borrowers profit margin For a particular loan applicant, X 1 0 83, X 2 0 25, and X 3 0 10 A ) What is the projected probability of default for the borrower B ) What is the projected probability of repayment if the debt equity ratio is 4 55

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Question: Suppose the estimated linear probability model used by an FI to predict business loan applicant default probabilities is PD = 0.03X 1 + 0.02X 2

Suppose the estimated linear probability model used by an FI to predict business loan applicant default probabilities is PD = 0.03X₁ + 0.02X₂ - 0.05X₃ + error, where X₁ is the borrower's debt/equity ratio, X₂ is the volatility of borrower earnings, and X₃ is the borrowers profit margin.

For a particular loan applicant, X₁ = 0.83, X₂ = 0.25, and X₃ = 0.10.

A.) What is the projected probability of default for the borrower?

B.) What is the projected probability of repayment if the debt/equity ratio is 4.55?

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